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What do Yahoo and Apple Have in Common?

Hint: Neither expects to get rich off its music service.

Michael Stroud
5.12.05

On the face of it, Yahoo and Apple have very different digital music strategies. Yahoo Music Unlimited, launched yesterday, is primarily a subscription service. Apple's iTunes is a download service.

But in one respect, the two companies are playing the same song. For both, music is a means to an end, not an end in itself. And that gives them powerful advantages over competitors such as Real Networks and Napster.

Apple doesn't really expect to make a mint from 99 cent downloads. Apple's real cash cow—the one that's sent its earnings and stock into the stratosphere—is the iPod. In fact, for all Apple's championing of intellectual property, the company makes money even (and perhaps especially) if millions of kids pirate songs off Bitstorm and load them onto their iPods .

Yahoo surely doesn't expect to make a lot of money charging $60 a year ( or $6.99 a month ) for unlimited access to a million tracks of music. Assuming a best-case scenario where Yahoo quickly gets a million customers, it would gross a mere $60 million or so a year. After marketing expenses and paying record labels' licensing fees, that's bupkis  —especially for a company that reported first-quarter revenue of $1.17 billion.

So where does   Yahoo expect to make money? Where it always has: advertising. Advertising is about aggregating eyeballs, and there's no better way to aggregate eyeballs than to have music fans flocking to your site to check out the latest music.

Yahoo's music strategy fits nicely into CEO Terry Semel's plan to make Yahoo a media company that's all things to all people . That's why he's creating a news division in Santa Monica and endlessly expanding Yahoo's search capabilities.

The more eyeballs, the more money you can charge advertisers.

No one service—certainly not music—is the killer app. But together, you have a media goliath with unmatchable reach. If that sounds like Semel's alma mater, Time Warner, it should.

By contrast, Real and Napster are much more narrowly focused companies. If Real's Rhapsody service and its other media services lose money, it's a big deal—its income from Real audio and video player software notwithstanding. Napster, dependent on its digital music service business, is even more vulnerable.

So while Yahoo could afford to practically give away its music subscription, the other two companies don't have that luxury. Which helps explain why both their stocks dropped Wednesday .

Apple, despite relying for its bread-and-butter on iPods, is also vulnerable to the Yahoo onslaught. Once iTunes users understand the idea of a music "subscription," it's going to be hard to persuade them that they're better off spending $10,000 to fill up an iPod with songs they own, vs. paying $60 a year for songs they de facto own as long as they continue subscribing. How many consumers, after all, buy DVDs at Blockbuster every week?

Still, Apple has two important advantages in the coming battle with Yahoo. First, it's still the far-and-away leader in digital music player sales. And—surprise—you're not going to be able to play Yahoo's Windows-dependent songs on iPods any time soon. For the millions of kids who don't bother paying for songs anyway, Yahoo's service is going to hold little appeal—at least until the RIAA succeeds in putting some UCLA pre-meds behind bars.

Second, if Real, Napster, and Yahoo can launch a subscription service, do you think Steve Jobs can't? As long as iPod sales continue to skyrocket with downloads alone, he doesn't have to. But think about it: once he does add a subscription model, are iPod sales going to be hurt by simply adding another way to enjoy music?

Let the games begin!

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